What happens to joint real estate if your business partner files for bankruptcy?

If your business partner files for bankruptcy, the trustee may be able to sell your joint real estate.

If your business partner files for bankruptcy relief, his or her interest in your jointly owned real estate will become property of the bankruptcy estate. How your partner’s bankruptcy will affect your interest in the real estate depends on the amount of equity in the property, state exemption laws, and whether he or she filed for Chapter 7 or Chapter 13 bankruptcy.

Your Partner’s Interest Is Property of the Bankruptcy Estate

When your business partner files for bankruptcy, his or her interest in your joint real estate (or in a business entity that owns the real property) becomes property of the bankruptcy estate. Keep in mind that if your spouse is your business partner and you live in a community property state, the entire property will likely become part of the bankruptcy estate.

When an asset is property of the bankruptcy estate, it means that the court has the power to administer it. What will happen to the real estate depends on whether your partner filed for Chapter 7 or Chapter 13 bankruptcy (discussed below).

Chapter 7 Bankruptcy

If your partner files for Chapter 7 bankruptcy, the  bankruptcy trustee  can sell his or her nonexempt assets to pay back creditors. Whether the trustee will go after your jointly owned real estate depends on the amount of equity in the property and your partner’s  bankruptcy exemptions.

If your joint real estate has no equity, the trustee will not sell it because there is no benefit to the bankruptcy estate. But if the property has equity and your partner cannot exempt his or her interest, the trustee may be able to force the sale of the entire property (including your interest).

To sell the entire real estate, the trustee must show that it is not practical to partition the property, the sale of the asset as a whole (not just your partner’s interest) would bring in significantly more money to the bankruptcy estate, and the benefit of selling the entire property to the bankruptcy estate outweighs the detriment to the co-owners.

However, keep in mind that you can always negotiate with the trustee to purchase your partner’s interest from the bankruptcy estate. If you cannot afford to buy your partner’s interest and the property is sold, the trustee must pay you the value of your interest from the sale proceeds.

Chapter 13 Bankruptcy

If your partner files for Chapter 13 bankruptcy, the trustee will not sell your joint real estate. However, your partner must pay unsecured creditors at least the value of his or her nonexempt assets. If your joint property has a lot of nonexempt equity, your partner may not be able to afford Chapter 13 bankruptcy. This can affect you if your partner converts his or her case to Chapter 7 and puts the joint real estate at risk.

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